Asia performed across the board with gains of between +0.5% to +1.1%. We have seen that carried forward into US trading with futures adding 1.5% to the cash closes. I want to move-on quickly to Europe today as this is where we are receiving many questions. The first thing we need to highlight is the why stock markets in Europe are so well bid; the implication of the ECB buying corporate bonds. You will have also seen the performance of the peripheral bond markets yesterday and today. European bank shares have been the best performing sector today because the ECB is about to buy most of their balance sheet. The rally in BTP’s (Italian Gov’t Bonds) and SPGB (Spanish Gov’t Bonds) is a combination of a guaranteed buyer (not price sensitive) and being paid to take the trade on (and passing it on – due to the guaranteed monthly buyer!). Italian bank shares (Unicredit and Sanpaolo) were both up over 6% higher today. This move towards credit also sends a signal to the FX market, that it could be the short-term end to the currency wars seen recently. DAX, CAC, and IBEX were all up over 3% today with financials leading the way. FTSE closed 1.6% higher.
The ECB will be expanding its balance sheet in the same way that the FED implemented TARP. The net result was that the FED doubled its balance sheet. The result will be the ECB paying the banks to lend money. You could say that if the ECB is running the banks, then do the banks really need to pay expensive staff – which is probably why Deutsche Bank told their staff today that your peers in other houses could well be paid more – having just declared an 11% reduction in the bonus pool. This approach also answers the fears surrounding the CoCo (Contingency Convertible) market earlier this year! Conveniently, the ECB’s new route also leaves the road clear for the FED next week to play its own game and worry about domestic rather than international affairs.
The US DOW, S+P and NASDAQ all closed on strong form with +1.5% gains across the board. Volumes were better also which bodes well ahead of the Fed and other central bank plays next week.
The Bond markets reaction is a clear signal the divide between Europe and the US has just shifted gears. As the US 10yr note heads towards 2% (currently 1.98%) while the 10yr Bund remains unchanged at 0.30% (+168bp). US 2/10 curve closed +102bp.
Italy 10yr note tightened again today but only small to close 1.43%, Greece 8.98%, Turkey 9.91% (-4bp) and UK Gilt 1.57%.